How does Executive－employee Pay Disparity Affect Sustainable Corporate Growth?

[Purpose]This study examines the influence of executive－employee pay disparities on a firm’s sustainable growth rate in Korea, where the regulatory frameworks have mandated transparency in the compensations of the top 5 executives. The primary focus is to analyze the two－way effect of executive－employee pay disparities, distinguishing between aspects that can be economically explained and those that are challenging to explain economically. [Methodology]Using 2,938 observations, we explored the pay disparity between five highly compensated executives and employees and analyzed the impact of this gap on the company’s sustainable growth. We estimate economically explainable executive－employee and non－explainable pay disparity using Rouen’s (2020) methodology. [Findings]We find that economically explainable executive－employee pay disparity increases a firm’s sustainable growth rate. Furthermore, this relationship is stronger in firms with high labor efficiency and productivity. Meanwhile, the negative relationship between Non－explainable pay disparity and a firm’s sustainable growth rate is more pronounced in firms with low employee wages. [Implications]The study offers insights into executive－employee pay disparities and their impact on firms’ sustainable growth rates, emphasizing the importance of fairly designed pay disparities in long－term corporate success.